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Captain Brookes keeps ship afloat

Myer chief executive Bernie Brookes didn't know it at the time, but the profit downgrade he issued in May last year was a turning point for the group and its shareholders.

Myer chief executive Bernie Brookes didn't know it at the time, but the profit downgrade he issued in May last year was a turning point for the group and its shareholders.

Brookes announced on May 23 that Myer's sales had fallen by 2.1 per cent in the third quarter of the group's July financial year, and warned that full-year earnings would be as much as 15 per cent down, downgrading guidance issued six months earlier for a profit slide of up to 10 per cent.

Europe's sovereign debt crisis was expanding, the sharemarket was tanking, and a half-percentage-point rate cut by the Reserve Bank at the beginning of May had not yet turned up in increased trade, Brookes said - and investors fled.

Myer was floated by private equity group TPG in November 2009 at $4.10 a share. Its shares were $2 when the earnings downgrade was announced on May 23, and between then and June 28 they fell another 23 per cent, to $1.54. As the January-half result Brookes has just unveiled confirms, that was a time to buy.

In May last year Brookes was already rebuilding service levels in the department stores, reversing cuts that had robbed Myer of sales and profit momentum.

European Central Bank president Mario Draghi was weeks away from turning the markets around with a blank-cheque promise to spend whatever was needed to defeat any selling raid on Spanish and Italian sovereign bonds.

The Reserve Bank's rate cut in May was also the beginning of an extended easing program. It cut its cash rate by a quarter of a percentage point in June, October and December to pull it down to its global crisis low of 3 per cent. It has not cut rates again this year and will hold for a while after Thursday's astonishingly strong unemployment data for February, but said last week that it had room to go lower if it needed to.

Myer has reported three consecutive quarterly sales increases since the earnings downgrade last year.

That's the best run since 2006, after TPG bought the group from Coles for $1.4 billion. And while sales growth is still modest, it accelerated from 0.8 per cent to 1.4 per cent in the past two quarters.

Net profit in the latest half was up only 0.7 per cent to $88 million, but that was about $3 million better than expected. The shares closed below their high for the day of $3.12, but at $3.07 were still up 17¢, or almost 6 per cent, on the day.

They have risen 90 per cent since that bum-bruising bottom nine months ago. Over the same period, the S&P/ASX 200 Index, which covers about 90 per cent of the market trade, has risen by 23 per cent. CBA's shares have risen by about 30 per cent, BHP is 12 per cent higher, and shares in Myer's department store rival, David Jones, have risen by about 15 per cent.

There are still a few flies in the Myer ointment. Myer was a celebrity float, flogged to all and sundry, and even after the rally its shares are still about 25 per cent under water.

Like all retailers Myer is also fighting internet retailers for market share, and both Australian department store chains were slow to recognise the threat and develop online selling channels of their own.

Brookes is maintaining his target of lifting online sales to 10 per cent of total sales, or about $300 million, within five years and says online revenue is rising at a compound rate of 200 per cent a year. That's off a very low base, though, and the length of the road ahead is implied by the group's unwillingness to disclose online revenue.

Still, there are some signs of progress. The established retailers are settling on a "clicks and mortar" strategy that sees their stores functioning as pick-up points, and in Australia the department stores are becoming more competitive.

Myer is buying more of its product directly from manufacturers, bypassing agents who were taking a cut that forced retail prices higher unless margins were sacrificed. It has also been able to coax, cajole and force suppliers to take lower prices, pulling retail prices here down without squeezing their own profit margins.

Brookes is cautious, but says conditions have improved. The arrival of foreign "fast fashion" stores including Zara and Top Shop is actually increasing traffic in nearby Myer stores, he says.

To really get Myer moving, though, Brookes must successfully roll out his Plan B. His original plan was to grow profits by opening new stores, but that has been heavily modified in the face of the internet onslaught. Plan B calls for sales per square metre to rise as store openings and closures offset each other to maintain Myer's footprint.

Once again, Brookes has made progress. When he took over in 2006, selling space accounted for about 60 per cent of Myer stores that had total space of about 16,000 square metres. Brookes is creating the same selling space in new 12,000-square-metre stores that are 80 per cent selling space.

So far, however, he has only stopped a decline in sales per square metre between 2006 and 2009. To secure Myer's future, he needs to push sales intensity higher.

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